I'm a thirty-year veteran of Wall Street and an outspoken critic of ineffective regulation and an advocate for economic and political sanity. Following a career as an in-house lawyer and industry regulator, I am now in private practice representing member firms, registered persons, Whistleblowers, and defrauded investors. I publish the RRBDlaw.com and the BrokeAndBroker.com websites.

Modernize Wall Street Regulation Instead of Occupying the Industry

In an effort to cultivate some long overdue realpolitik at the SEC, I offer you the following excerpt from Director Cross’s remarks and urge you to inundate the SEC with suggestions and comments (footnotes deleted):

Capital Formation Initiatives

Even though we are very busy implementing Dodd-Frank, we also are keenly focused on our capital formation initiatives. Early last year, Chairman Schapiro tasked us with a new initiative. She asked us to take a fresh look at our regulations to determine how we could better facilitate capital formation without compromising critical investor protections. The Chairman asked us to look at a number of areas, including the triggers in our rules that require private companies to start Exchange Act reporting and allow reporting companies to stop reporting (or “go dark”); whether our private placement exemptions are appropriately structured to help smaller companies raise money, particularly in light of the changes in the way people communicate and interact; and whether the restrictions on communications in registered offerings, including initial public offerings, continue to be appropriate and necessary for investor protection.

If we look back sixty years at the capital markets, there has been tremendous change, some of it brought about by technology and some of it by changing attitudes and ways of thinking about regulation and capital raising. It was about sixty years ago when a part of the structure for private offerings of securities was established, with the Supreme Court decision in Ralston Purina,which allowed issuers to offer and sell securities in so-called private placements to investors who could fend for themselves — focusing the inquiry on whether an investor needs the protections that come with registration. It was about fifty years ago that the basic regulatory structure for unlisted, unregistered companies was established, when Congress added Section 12(g) to the Exchange Act:U.S. issuers with $1 million in assets and 500 shareholders of record were required to register with the SEC and became subject to the periodic reporting requirements of the Exchange Act (the Commission has since raised the asset number to $10 million).

Several decades on, we find ourselves faced with a changed, and rapidly changing, world. One in which regulators must find ways to adapt without sacrificing the key principles of investor protection that underlie our system of rules and give investors the confidence they need to put their money at risk in our markets. In doing so, I think we have to ask ourselves some fundamental questions about how our regulatory scheme works in the context of significant changes in the markets and in the ways that we communicate. Included among these are:

How does the concept of a private placement fit in the age of social media, bloggers, and 24/7 news coverage? And how should we think about restrictions on general solicitation against that backdrop?

How does a regulatory system for registered offerings originally premised on carefully controlled communications — structured so that investors’ attention is directed to the important, balanced, complete, and (hopefully) reliable information in prospectuses — stay relevant when investors are bombarded with information coming through sources that issuers often cannot control and that we never could have foreseen when the rules were written?

Is a “quiet period” for a registered IPO realistic today, and are we helping investors by limiting information in these offerings?

If more communication is better, as many would advocate, how can we assure that investors are protected and that those who communicate with the goal of encouraging investors to invest are held appropriately accountable so that they take care in deciding what to say?

With pre-IPO companies widely trading in private company markets, widespread use of equity to pay employees, longer periods between formation and IPO, ever-expanding OTC markets, and securities ownership increasingly shifting to indirect forms, what are the characteristics that should determine whether a company should be subject to registration and reporting under the Exchange Act?

Commission staff have been thinking about these questions, and working to bring recommendations to the Commission to address at least some of the concerns raised by these questions. As part of this effort, we are thinking about whether there are ways to make going public easier and whether the ban on general solicitation is still necessary and workable. . .

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I have to disagree with you, not that the issues that you identify are not real, they certainly are, but that those are more the symptoms than the disease. The broader issue is that there has been very little, if any, growth in the economy of the United States over the last several decades. Manufacturing, the sector of the US economy that defined this country and lead to it economic dominance in the world, has been declining for decades. It was manufacturing that created the broad economic prosperity that dominated US politics for generations. With the decline in manufacturing, there has been a general decline in the health of the US economy.

The only consistent growth sector has been Finance, Insurance, and Real Estates, aka “FIRE” or simple “Wall Street”. FIRE constitutes 40% of all profits generate in the US while a generation ago is was closer to 4%. This process has been called the “Financialization” of the US economy. Take away the profits from Wall Street, and there are hardly any profits left at all.

The problem is not that there is a lack of ability to regulate Wall Street, the problem is a lack of desire to regulate Wall Street. It is the only game in town.

We clearly disagree. First off, there was tremendous growth in the US economy “over the last several decades,” so that premise is, in my opinion, false. The economic growth from the 1940s through most of the 90s was stunning and perhaps unseen in history.

We agree that our manufacturing sector has diminished but there are many reasons for that. First off, as economies mature they tend to drift more into providing services than manufacturing — for better or worse, it’s a debatable proposition as to the benefits but historically accurate. Similarly, mature economies have always shown a tendency to subcontract out to their colonies, dependencies, etc. more aspects of manufacturing in order to take advantage of cheaper labor costs and raw materials. While that is little more than exploitation, it is an irrefutable fact.

The fact that there has been a decline in what you call our manufacturing sector is not necessarily the cause of what you describe as a decline in our economic health. That strikes me as conclusory. Our recent economic declines seem to me the result of over dependence of foreign imports without recognizing the hidden costs of buying cheaper foreign merchandise is often the unemployment of higher-paid US workers. On top of that, we went through a period of unbridled consumption in which consumers were encouraged to put together wish lists of wants and “finance” the purchases despite lacking available funds. That was a credit bubble. Finally, the political corruption that permeates all levels of government expanded government and services on the back of kick-backs, bribes, and payoffs to the point that the piper had now come to be paid.

Wall Street as an “industry” is something of a false concept. The securities industry manufactures nothing and produces nothing of a material nature. It is merely a mechanism by which our capitalist economy raises venture capital and provides for the financing of businesses. At best, Wall Street is a remora on a shark; at worst, it become a man-eating shark. The incredible concentration of wealth in Wall Street gives it influence that is often disproportionate to its true role in our economy and permits it to enroll politicians and regulators in an effort to legislate what’s best for the securities industry — which is often detrimental to other business sectors, including manufacturing.

As a libertarian, I prefer a political landscape that promotes a robust, free-enterprise economy that has a limited hand of government interference and keeps the government out of our bedrooms and boardrooms. Notwithstanding, we still need some regulation and laws, and we need police and prosecutors to enforce that commonwealth of interests. In recent years, we have had a failure of the commons and a splintering of our society. I am even handed in blaming both the Republican and Democratic parties and the left and the right.

Unfortunately, all societies have historically contained the seeds of their undoing. Empires come and go. We appear to have come to our crossroads and it remains to be seen whether this nation’s incredible resilience will once more rise to the occasion. If not, there’s China, Russia, Brazil, India, and other nations vying to replace us. Frankly, it’s a shame because our political system still strikes me as far superior than any other nation’s because we exalt the individual and espouse capitalism. Still, we haven’t done that great a job the past decade and time’s runnning out.

Perhaps it might be more useful to start at the other end. Deloitte LLP makes clear in their recent report:”U.S. companies’ return on assets (ROA) have progressively dropped 75 percent from their 1965 level despite rising labor productivity.” Conversely, the corporate debt to equity ratio has nearly doubled over the same period. The same falling pattern was noted in the Return on Equity (ROE), as opposed to Return on Assets (ROA). “This measure of asset profitability [ROE] is especially important as the overall debt/equity ratio for U.S. companies has been rising steadily, obscuring the underlying erosion in asset profitability”.

Consider further the performance of the stock market, today the DJIA and SP500 stand about where they did 12 years ago. On January 14, 2000 the DJIA was 11,722.98 and on October 9, 2007 it was 14,164.53 while on March 9th of this year it was 12,922.02. This is the “Lost Decade” of the US stock market, this is why so many pension plans, both public and private, are in such difficulty. Pension plans are based on getting a minimum return on investment which will support the growth in their income to support their retirees. The poor performance of the stock market means that pension plans are not earning what they need to stay solvent. When investments of public pension plans fall below target, governments generally have to make up the difference. Much attention has recently been thrown on the issue of public liability for pension plans of public workers. Costs to local and state governments have been climbing dramatically, largely because of poor returns on investments by public employee pension plans. The investment strategies have not changed since the 1930′s but the actual performance has declined exactly in parallel with the poor performance of the stock market. (Private pension plans get less attention because if they are under-performing, it does not make any news).

At the other end of the equation is the general population of the United States. As the industrial base of the US has declined over the last four decades, these middle strata of workers has been slowly declining. The City of Detroit is the bellwether of this process. Once the industrial envy of the world, it supported a huge industrial working class with single family detached homes and two car garages. Further, it supported huge service sector which provided the needs of those industries and workers. Today it is a dusty ghost-town. What has happened in Detroit has happened less visibly in hundreds, indeed thousands, of other localities. Men who were machinists in factories are now driving cabs. Women who were managers in factors are clerks at K-Mart. Multiply this across millions of Americans and you have a generalized decline in the standard of living and overall economic health.

i would point you towards jeffrey vavra’s comments on a different posting on the same topic here at Forbes.com. It is unfortunately all too typical.

I love a good debate and a free exchange of ideas, provided it remains respectful. So, let’s have at it.

You wrote in your last comment:

This is the “Lost Decade” of the US stock market, this is why so many pension plans, both public and private, are in such difficulty. Pension plans are based on getting a minimum return on investment which will support the growth in their income to support their retirees. The poor performance of the stock market means that pension plans are not earning what they need to stay solvent. When investments of public pension plans fall below target, governments generally have to make up the difference. Much attention has recently been thrown on the issue of public liability for pension plans of public workers. Costs to local and state governments have been climbing dramatically, largely because of poor returns on investments by public employee pension plans. The investment strategies have not changed since the 1930′s but the actual performance has declined exactly in parallel with the poor performance of the stock market.

Permit me to take a different perspective but one that doesn’t necessarily disagree with your observations but would add another, additional point. If you research the past decade of criminal prosecutions, you will see that a number of defendants have been named in pension fraud cases and more than a handful fell within the ambit of government/civil service administrators who held out their grubby hands for payoffs. Additionally, the role of organized crime in strong arming this area or “directing” investments is legendary.

A well-run pension fund should not be dependent upon the stock market as a sole means of preserving pensioners capital or achieving returns. Just because the stock market exists doesn’t mean that every pension fund is acting prudent by buying/selling stocks. Sometimes the best investments a pro makes are the ones he avoids. Frankly, the whole collateralized toxic pool of garbage was made possible, in part, because supposed investment gurus (many of whom directed strategies utilized by public pension funds) refused to temper the promised returns against the exotic and unknown nature of the risk of these new products.

The City of Detroit is the bellwether of this process. Once the industrial envy of the world, it supported a huge industrial working class with single family detached homes and two car garages. Further, it supported huge service sector which provided the needs of those industries and workers. Today it is a dusty ghost-town. What has happened in Detroit has happened less visibly in hundreds, indeed thousands, of other localities. Men who were machinists in factories are now driving cabs. Women who were managers in factors are clerks at K-Mart. Multiply this across millions of Americans and you have a generalized decline in the standard of living and overall economic health.

What happened in Detroit is whose fault again??? Seems to me that there’s plenty of blame to go around. Detroit decided that Henry Ford was right when he said they can order any color car that they want as long as it’s black. Detroit offered little more than gas guzzlers and cars that fell out of fashion with both a domestic and worldwide audience. Detroit got lazy and smug. Ultimately, a car isn’t much different from any consumer product — buyers want something stylish and at a price. Style can trump cheap costs as Apple has proven time and time again. Cost can trump better quality as the old Betamax and VHS standard proved when the inferior but cheaper product won.

So, for me, Detroit failed because the industry failed and that’s a finger you point at management and at labor. Labor burdened the industry with excessive pay and benefits packages that put a disincentive in management’s eyes when it came to building new models and lines. You maximized profit by rolling out a new model with largely cosmetic changes. Management destroyed the industry by turning a blind eye and a deaf ear to the consumer.

I think it is useful to keep the question at hand in focus. Your blog suggested that Wall Street is insufficiently regulated, you wrote:”What passes for policing Wall Street is little more than the activity of a coroner reading toe tags in the morgue.” This pithy and well observed summary of the situation is one that I agree with.

Where we differ is why is this occurring, why have the financial regulators taken up the task of cleaning up Wall Streets messes rather than preventing them. My position is that Wall Street (i.e. FIRE) is the only consistent “growth industry” in the United States and Washington is afraid to tamper with it. You appear to take the position that the US economy is just fine.

My point in identifying problems like Detroit or public pension plans is not to assign blame. I am not attempting to determine “fault” but “fact”. I was simply attempting to demonstrate that the FIRE sector of the economy has come to be the dominant one and that outside of parts of lower Manhattan and the west side of Los Angeles (and other financially driven geographical areas) the US economy is not in very good shape, indeed poor really. Who to “blame” for this fact is entirely beside the point that I was attempting to make.

I do not believe that in either of your replies, you challenged the facts in question. So I would stand by my contention that the FIRE sector is indeed to sole, reliable growth sector in the US economy. They are fearful that “too much” regulation would cause even further economic decline. Washington’s regulators would rather pick-up some corpses others leave rather than produce more on their own.

The curious reader may wish to do an internet search on the term “financialization”, there are numerous scholarly papers and discussions on the topic. Here are but two…

Where we differ is why is this occurring, why have the financial regulators taken up the task of cleaning up Wall Streets messes rather than preventing them. My position is that Wall Street (i.e. FIRE) is the only consistent “growth industry” in the United States and Washington is afraid to tamper with it. You appear to take the position that the US economy is just fine.

I have no problem with a collegial disagreement but please don’t set me up as a strawman or put words in my mouth.

I do not believe that our financial regulators have sincerely “taken up the task of cleaning up Wall Street.” As I have so frequently written, far too much of what passes for regulation these days is merely window dressing. We seem to agree, however, that there is minimal focus on preventing fraud rather than the post-mortem clean up.

Similarly, I concur that Wall Street often gets a “hands’ off” treatment from career politicians who are quite dependent upon the industry for bribes, which some prefer to euphemize as lobbying funds or campaign contributions — I will have none of that. While we may differ as to exactly what you mean by deeming Wall Street as a “growth industry,” we certainly agree that there’s money on Wall Street, that politicians have their hands out, and that the corrosive influence of money and legislation has impeded any meaningful regulation of the securities industry.

Finally, never, ever attribute to me such false boosterism as suggesting that “the US economy is just fine.” It is not. It is addled with excessive and inefficient regulation and it is hamstrung by inept regulators and corrupt politicians. Similarly, our economy remains constrained by myopic CEOs unable to free their companies from the tyranny of each quarter’s financials.

Generation after generation, Americans rose to challenges and built this nation into an economic powerhouse. As you noted, once, that wealth rested upon ingenuity fueled by manufacturing. More recently it has rested upon technological advancements and outsourced manufacturing — a la Apple, for example. Some argue that firms such as Apple come with a dangerous price in the form of substandard wages an

At the time that I had begun taking out privately dispersed student loans I was in my second year of schooling in which I had transferred from a liberal arts college to an accredited state community college to allow me to peruse a career in Engineering as well as participate in collegiate athletics. The reason at the time for taking out such loans was due to the lack federal loan availability. That second year according to the FAFSA that had honestly filled out by my parents, I was not eligible for any student aid, grants, or loans. Therefore in order to pursue the dreams and goals that I had set for myself to obtaining a degree in Engineering and playing baseball at the collegiate level, my parents and I had to take out variably accruing private student loans. I must say that I was not the most knowledgeable person about how financial institutions worked or even how an interest rate worked at that time. What I did know at the age of 19 is that I had excelled in high school in math and science and at baseball outside of the classroom. I had a GPA above 3.0 and was a member of the national honor society. It was clearly evident at that time that I had the ability to do all of these things. So therefore taking out the student loans did not seem like too much of a risk. As time proceeded over the five years of schooling the cost of tuition and living as well as the interest rates on the loans continually rose. I was borrowing between twelve and fourteen thousand a year in combination with working on the side in order to cover tuition and living expenses. By the time that my schooling had ended, the gross total that I had borrowed including interest was ninety eight thousand dollars. At the time that I had started borrowing I did not quit realize that these loans would get this high. However, at the time I had also realized that I couldn’t just stop taking the loans and quit school. Then I would be in a situation in which I did not have a degree and would have these loans to repay as well. I basically had created a situation for myself in which I had to continue borrowing and failure was simply not an option. This was very stressful! At one point I even had to forgo my senior season of baseball at the University of Akron in order to take the required classes at that time so that my graduation would not be pushed out one semester causing me to default on my loans. At the time I was in a position to be the starting catcher on the team. This was very heartbreaking to me. This was the first time in my life I had realized that no matter how hard I worked I could not control my future and was a victim of circumstance. Once I had graduated and became employed the next step in the dream was to pay down the student loans as fast as possible in order to someday be able to afford children and a home. At this time the minimum loan repayment amount was seven hundred dollars a month. It was very discouraging at first to see nearly thirty percent of my paycheck go directly to loans and interest but I told myself that as time went on I would be able to put more and more towards them. However, as time went on it has become harder to save and maintain a normal standard of living while paying on such drastic loan amounts. One of the main reasons for this is that after paying the minimum required monthly amount I still have other expenses in the form of rent, a car payment, utilities, grocery, health expenses, and phone, not to mention gas expenses that are continuing to climb. This leaves me with a minimal amount of income to use as leisure or save for an emergency. I currently do not have the ability to pursue any entrepreneurial ventures in my career as well. As time has passed I have not seen the pay raises from the company that I currently work for to counter balance effects of school loans on my budget. Due to the bad economy my company has had hiring and pay freezes as well as layoffs. At one point in time I was so concerned about getting laid off and the possibility of defaulting on my loans, that I took it upon myself to start a side business through a partnership in order to be able to pay my loans if something were to happen to my job. This was so stressful to my body, that at one point I developed insomnia and was only sleeping about three hours nightly. This caused me to have to sell my business and salvage what I could from it. The lesson that I had realized from this is that there is only so much you can do and only so many hours in a day. Over the past few years I have contacted almost every major lending institution about refinancing my loans and none of them are willing to loan to me unless there is some form of collateral. Most recently I have tried to contact my student loan provider in order to renegotiate the payments and possibly the interest and I have been told by American Education Services that I do not have negotiation rights on my loans. That I simply must pay them or go into default, in which my taxes and wages will be garnished. After reviewing my initial promissory note from Chase Bank, it has come to my attention that on the promissory note it states that the loans provided by the bank would not be sold to another provider unless the loans had come into default. However, this is the first thing that the bank did once my loans had matured. I have already spoken with lawyers concerning the matter and I have been told that these types of loans simply can’t be negotiated or declared bankruptcy against. Some of the additional grievances that have been cause by my school loans are as follows. Since my current loans involve me repaying seven hundred dollars a month as a minimum for the next fifteen years with only 12 months of forbearance, I have come to the conclusion that I must make at least a wage of twenty dollars an hour simply to cover my basic living expenses in order to simply survive. This does not account for any times of emergency expenditures that may occur in that future time period. Therefore this prevents me from taking any type of sabbatical from my job or any type of freedom from changing careers as well as the possibility of being unemployed for twelve month within that fifteen years. These loans are preventing me from buying and owning my own home. They are causing me to have relationship problems in that most people do not want to be involved with someone who has so much person debt. These loans are hindering my ability to have any future with having children. These loans are causing me to live at a standard living below the normal reward and benefits of even having a career in Engineering. In other words I have come to the conclusion that for the stress and strain of doing Engineering work it is simply not worth the final pay after taxes and loan payments. I have been a very hardworking clean and honest person my entire life. I did exactly what I had been told to do by my educators and authority figures. I have absolutely busted myself for the last ten years of my life to try and make a future for myself and a possible family. I have taken the step necessary to prepare myself to produce and provide for my country. However for some reason I find myself at the age of twenty nine, ninety thousand dollars plus interest in the hole! So I have to pose the question of what it was that I did wrong along the way? Sometimes I feel as if I am a glorified slave. Sometimes I think to myself that the only true way to get ahead in this system is to simply find as many loopholes as possible that do not currently have laws against doing. I cant help but thinking that playing by the rules, and doing the hardworking and honest thing, simply gets you taken advantage of. How is it that I can successfully educate myself enough to work for an energy company and play a very important role in society and be ninety thousand dollars in the hole, while there are people out in society who have occupations that in which some are debatable to be immoral and others that do not generate any type of useable wealth for the country and these people are filthy rich? If there are any suggestions or solutions for any type of relief please let me know. If I do not find any resolution to my problem in the future then I will assume that there simply is no future for me or my future family in this country for the American dream for me does not exist, and will consider the possibilities of defaulting on my loans permanently and moving outside of the boarders of this country. chaseliggett@gmail.com

Respectfully, I’m not quite sure what to make of your situation. I borrowed the funds to put myself through college and law school and spent ten years paying off each of those debts. To do so, I often worked nights and weekends, sometimes at a second job. When attending college, I was employed around my class hours — sometimes working mornings, sometimes nights, and always on the weekend to make ends meet. When I attended law school, I transferred to the night division in order to work full-time days in the law department at Smith Barney. I know of many colleagues with the same story.

In my lifetime I have seen many recessions, including the crushing Arab Oil Embargo that found me managing a Burger King at nights in order to survive. While I will not minimize the historic nature of the Great Recession that we are still dealing with, I’m not sympathetic to anyone who would believe that the best solution to a problem such as yours is to “default(ing) on my loans permanently and moving outside the boarders of this country.” If you think that you will find a better life in another country, so be it. Perhaps there is more demand for engineers elsewhere, certainly in Brazil and other emerging nations there is a shortage of professionals. That being said, how does finding a job equate with the ethics of defaulting on your loans?

At your age of 29 I was working as a night manager of a liquor store, preparing to attend law school, and in need of loans to accomplish that goal. My father had died when I was 19 and I was an only child and single. Even at that age I understood that no one owed me a job, I wasn’t entitled to a free education, and life isn’t fair. Now, at the age of 60, I still hold those beliefs and look back upon a lifetime of what I would deem hard work and effort, and living within my means. When you ask “what it was that I did wrong along the way?” you seem not to understand that life often places us in situations not as a result of anything that we did right or wrong but simply because that’s how things progressed. You might as well ask what you did wrong to cause today’s earthquake in Japan — there’s no relationship.

In closing, let me share with you this quote that has often hung over my desk and has motivated me for many years:

Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent.

Calvin Coolidge

I sincerely wish you the best of luck and you are welcome to privately and personally contact me.